Risk - counterparty

Approaches to Investing short-term cash in Corporate Treasury

Report date: 
22 Apr 2025

Commentary

Risk versus reward. 

Treasurers face this eternal trade-off directly when investing short term cash. There is pressure to increase earnings, and a constant search for new solutions, but the priorities remain, in order:

  1. Safety
  2. Liquidity
  3. Yield

Companies put a lot of effort into making money and bringing in cash: the potential downside to losing money outweighs any yield benefit risky investments may bring.

As always, there is a lot of complex detail, depending on the size, the cash balance and the culture of the company.

  • Most companies have a formal investment policy, often approved by the board.
  • One of the benefits of centralising cash is to avoid paying the bid/offer spread of having cash in one place, and debt in another. Several peers used notional pooling (BMG and JPMorgan were mentioned) to achieve this. Both banks offer deposits for the cash in the pool.
  • The most used instruments are bank deposits and MMFs (Money Market Funds). A few peers invest directly in high quality sovereign bonds, as well as repos. The rules can be more flexible in highly regulated countries, such as Turkey and Angola.
  • Some peers used bank deposits as a means of balancing wallet share with relationship banks, but most take advantage of the higher rates provided by MMFs.
  • Others left pools of cash in different countries and regions: in these cases, the short term investments were frequently managed by a team in central treasury.
  • One peer managing Latin America was pleased with the better yield offered by some currencies with higher nominal interest rates, though this was not a common approach. Most of the commonly used instruments are available in...

 

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Topics covered in this report: 
Money Market Funds, Investing, Risk - counterparty, Bank Accounts
Service providers discussed in this report: 
Westpac, Bloomberg, JP Morgan, Bank Mendes Gans, spotfire, Blackrock, Cachematrix, FIS, 360T, Santander, Itau, Citi, Bank of America, Deutsche Bank, Credit Suisse, Pictet Asset Management

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Corporate Treasury Payment Service Provider Relationship Management

Report date: 
24 Oct 2023

Commentary

“May you live in interesting times” goes the old Chinese curse. Whether we are cursed or not, we are certainly living in interesting times.

This call focused on one area of the information revolution – Payment Service Providers

(PSPs), but it was an illuminating insight into the challenges treasurers face. The multitude of payment methodologies and PSPs are forcing treasurers to deal with many different approaches, companies and formats. Today digital sales are mostly for B2C transactions, but this is spreading to B2B as business models evolve.

As treasuries move to APIs, bots and other less structured forms of communication, everyone will face the issues discussed in this report (the full 18 page report is available to premium subscribers - enquire here for details).

The biggest issues participants raised are:

  • Ownership. Treasury clearly owns the relationship with traditional banks. But many treasurers find that marketing or other functions (notably IT) sign up the company for a PSP relationship, and then leave it for treasury to resolve the issues. Participants are beginning to lay down rules for approving new relationships, usually involving marketing and IT.
  • Management system. One participant has a rigourous process which involves marketing, IT and treasury to make sure all aspects are covered.
  • Local vs global. Some PSPs are global, while others are regional, or purely local. The purely local ones are usually left to local or regional teams to manage, while global ones are typically managed from HQ. In some cases, only local options are available: this is a challenge for centralised treasuries.
  • Global PSPs. The main providers mentioned were PayPal, Ayden and WorldPay. No-one finds they can
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Topics covered in this report: 
PSP, API, Cash forecasting, Risk - counterparty, Virtual accounts, Receivables

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Counterparty Risk - A Reality Check

Report date: 
11 May 2023

Commentary

Risk management. Every treasurer includes this as part of their job description, and we are rightly proud of what we do in this area. But, every now and again, we get a reality check. How good are our processes? 

Recent events have provided just such a check, with the failure of Silicon Valley Bank (SVB) in the US, and Credit Suisse. This call was a “lessons learned” session, with an excellent and very detailed discussion on the operational aspects of what people went through, together with some of the broader issues, including the, very human, tendency not to take risks seriously until they materialise.

The call took place before the failure of First Republic Bank, and its acquisition by JPMorgan.

This summary is two pages long – this was a very detailed call, with a lot of practical learning and experience sharing. 

So I will put the bottom line before the long read: the participants who had problems with the collapse of SVB did so because they had delayed integrating recent acquisitions into their normal counterparty risk management processes. With acquisitions, there are good reasons for doing this – but also risks. Others felt management was losing sight of these issues – so it was a useful wake-up call. All participants were grateful to their centralised processes, which meant they could get the information on the exposure quickly, even if this required working with other, centralised, functions. All participants are moving away from using smaller regional or local banks, wherever possible.

It can be hard to justify having a proper and rigorous counterparty risk management process, especially when it has been a few years since the last significant bank failure. This was an important wake-up call. Fortunately, it came at no cost.

Operational issues:

  • Generally, SVB created more anxiety, as the failure became apparent on a Friday, and the intervention of the US federal authorities only became certain over the weekend.
  • Everybody scrambled to understand what payments were going into SVB, so they could be put on hold. The concern was that, if you pay employees or suppliers by making a transfer into an account with a failed bank, they may not be able to access the cash. This concern was
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Topics covered in this report: 
Risk - counterparty, Bank Relationships, In house bank
Service providers discussed in this report: 
Silicon Valley Bank, Credit Suisse

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